SIMPLE IRA Plan Fix-It Guide – You have more than 100 employees who earned $5,000 or more in compensation for the prior year
Find the Mistake
Fix the Mistake
Avoid the Mistake
2) You have more than 100 employees who earned $5,000 or more in compensation for the prior year.
Review prior year’s compensation data to determine if you had more than 100 employees who earned $5,000 or more in compensation.
Stop employer and employee contributions to the SIMPLE IRAs.
Prior to establishing a SIMPLE IRA plan, ensure that you meet the requirements.
You're ineligible to adopt a SIMPLE IRA plan if you have more than 100 employees who earned at least $5,000 in compensation for the prior year.
You must count all employees who met the $5,000 earnings threshold in determining whether the 100-employee test is met. This includes full-time, part-time, seasonal and leased employees. In addition, if you're a member of a controlled group or an affiliated service group, all employees of the businesses in the group are considered your employees.
A grace period may apply if you've maintained a SIMPLE IRA plan for at least one year before you exceeded the 100-employee limit.
How to find the mistake:
Review the prior year’s compensation data (from payroll records, W-2s, quarterly filings with the state) and determine if there were more than 100 employees who earned $5,000 or more in compensation during the previous year. When reviewing prior year’s compensation, make sure you count all compensation, including overtime, bonuses and commissions.
Generally, compensation means the sum of wages, tips and other compensation subject to federal income tax withholding and the employee’s elective deferral contributions made to the SIMPLE IRA plan.
When counting employees, “employee” includes all employees of all related employers. Related employers include controlled groups of corporations that include your business, trades or businesses under common control with your business, and affiliated service groups that include your business. This means, for example, that if you and/or your family members own a controlling interest in another business, employees of that other business are “employees” for purposes of determining the 100-employee limit. The controlled group and affiliated service group rules are complex. The examples below illustrate that if there are entities that have common ownership interests or are engaged in performing services for (or with) each other, they may be related entities that would be considered a part of a single controlled or affiliated service group. If this applies to you, consult your tax advisor to determine whether you are part of a controlled or affiliated service group.
Example: If A owns at least 80% of B, A and B are members of a controlled group.
Example: If five or fewer persons, each having some ownership stake in A and B, collectively own at least 80% of A and B, A and B are members of a controlled group.
Example: If A is a shareholder in B, and its primary purpose is the performance of services for B, then A and B may be members of an affiliated service group.
Example: If A is a shareholder in B, and regularly associates with B in the performance of services for third parties, then A and B may be members of an affiliated service group.
Leased employees: Employees of an organization who, based on an agreement between the organization and an employer, perform services for the employer on a substantially full-time basis and are under the control and direction of the employer (leased employees) are considered employees of that employer under a special rule and must be counted in determining the number of the employer’s employees.
How to fix the mistake:
If this is after the grace period, stop making new contributions to the plan. You can file a VCP application requesting that contributions made for previous years in which the employer had more than 100 employees remain in the employees’ SIMPLE IRA accounts.
Correction program(s) available:
This mistake cannot be corrected under SCP.
Voluntary Correction Program:
If the plan isn’t under audit, you may make a VCP submission using the model documents in Appendix C, including Schedule 4. You must include Forms 8950 and 8951. The fee for the VCP submission is $250.
Audit Closing Agreement Program:
If this mistake is discovered on audit, the relief that may be provided under VCP may still be available. However, you'll have to pay a sanction. The sanction under Audit CAP is a percentage of the maximum payment amount.
How to avoid the mistake:
Prior to establishing a SIMPLE IRA plan, determine whether you are eligible to have one. Make sure you include all employees for the “100-employee” count. This includes full-time, part-time, seasonal and leased employees who earned more than $5,000 in compensation in the prior year. It also includes employees of other employers in the same controlled or affiliated service group. If you had fewer than 100 employees and the business grew to exceed 100, the rules provide for a grace period. Generally, the grace period is two calendar years following the year in which the 100-employee limitation was last satisfied. (The grace period may be different if you exceed the limitation because of an acquisition or disposition involving your business.) During the grace period, you may still make contributions for the affected employees. At the same time, you have the opportunity to set up another type of retirement plan for your employees, but only after the year of the last contributions to the SIMPLE IRA plan.